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Breaking down silos and creating a more humanistic network where people can interact




Since the 1900s, we have been conditioned to look at systems as machines rather than designing them in a way that humans can interact with each other to make every link in the supply chain more meaningful. Ed McKnab believes new organizational architectures that break down silos by encouraging collaboration and communication are necessary for success as we push forward in the 21st century.


With the need for supply chain collaboration at an all-time high, Ed McKnab sees the topic of silo-based organizational architecture as a discussion that should be pursued primarily because silos tend to hinder innovation. Ed believes new organizational structures are a prerequisite for expanding into the 21st century, and that organizations need to think differently about how they interface with both suppliers and customers. The goal, he says, is to enable collaboration on a much deeper and more effective level.



Over the years, Ed McKnab says, we have turned everything we do into a "mechanistic concept." We view factories as large machines and we view the people within factories as machines. We have designed the work that they do to be moving a widget from point A to point B. Since the 1900s, we have been conditioned to look at systems as machines, rather than designing them in a way that humans can interact with each other and make it more meaningful. "I think that we have to transcend this concept of looking at everything like a machine, and we have to design systems that allow people to complement machines to take this out of a mechanistic environment and move it to a more humanistic environment," he added. That, he says, is what makes is what makes silos difficult to work with, because when everyone is trained to work within their own silo, they are not comfortable stepping outside of it and interacting one-on-one with people.



The first step is redesigning our organizations and looking at the way we interrelate with each other much differently. Organizational leadership also plays a vital role in breaking down silos and creating a more humanistic network where people can interact. If we can accomplish this redesign, Ed McKnab said, it will have a big impact.



Software too, he added, has forced us into silos and put limits on the way we interact and collaborate. "From a shared information perspective," Ed McKnab said, "we have to rethink how we design software and what happens to that software once installed inside an organization. So, not only do we need to see organizational change, we need to see changes in the tools we use to manage those organizations, particularly the software.”



About Ed McKnab:


Ed McKnab has a doctorate in organizational leadership and his consulting practice is focused on designing global supply chain EdMcknab.jpgand the distribution networks that tie into them. His career has been focused on expanding global businesses within the international community.



In the early part of his career Ed McKnab worked as purchasing manager in Japan and Taiwan, before moving to China in the early 80s to develop and establish the region as a sourcing target. Over the years, he has worked with a number of companies, including Black & Decker during which time he assisted them in moving their global supply chain from manufacturing in the United States to manufacturing in Europe and Asia as part of their expansion plan.


LinkedIn Profile:


Collaboration is the Key to Streamlining Supply Chains


How you can leverage today's technologies to get people talking




Summary: Tracey De Leeuw, CEO of Smart Speed and, has been an advocate of fostering business environments that allow trading partners to share information and ideas online, in real-time, since her earliest days as an e-business strategist in 1993. In her view, collaboration shouldn't be put into play on a project-by-project basis. If you want to create true efficiencies, collaboration should be ongoing and dynamic. Discover how new technologies, new ideas and new processes make it possible.




* Tracey De Leeuw, a longtime e-business strategist, sees the recession as an impetus for adopting best practice technologies and processes that have been kicking around in the logistics industry for the last ten or fifteen years.




* In Tracey's opinion, as companies move forward, they should be sourcing differently and buying differently with an eye toward sharing information and resources.




* Learn why Tracey advises companies to broaden the scope of collaboration beyond individual projects.





Bringing Innovation to the Forefront of Supply Chain



During our interview, Tracey De Leeuw said she sees the recession as an impetus for adopting best practice technologies and processes that have been kicking around in the logistics industry for the last ten or fifteen years.




Prior to the recession, most of us had a mindset that said, "If it is not broken, do not fix it." Today, Tracey says, people realize that things are broken; they have to find better, less expensive, and more efficient way to do things. Executives are going to have to find new ways to accomplish the same objectives, like finding new suppliers to replace those who have gone out of business and finding new methods of sourcing products at lower prices to be more competitive. The recession, Tracey believes, is a chance to bring supply chain innovation to the forefront.




Learning to Do More With Less (Again)



Tracey De Leeuw asked Dustin to think back to the recession of the 80s -- a time when we first learned how to do more with less. For example, until that recession, double-stack shipping containers on trains were unheard of -- today they are the norm.




Again, thinking back to the 80s, Tracey remembers a time when "pick, pack, and ship" was done by three different people. It took a recession to realize that three jobs could be consolidated into one.Recessions, she says, can be the catalyst for positive change, and it is important to remember lessons learned 20 or 30 years ago.




The current recession has had a similar effect and has resulted in a strengthening of relationships with people in our supply chains. "This is an opportunity to remove nonvalue-added activities," said Tracey, "and to find supply chain partners who can take on more activities. In other words, instead of piecing out jobs to a lot of people; we have the opportunity to find partners who offer broader services."




In Tracy's opinion, as we move forward, "We're going to buy differently, we're going to source differently, we're going to share resources, and we're going to share information." And while she is not sure if it is a direct result of the recession, or the shrinking labor pool, she is sure that people will have to uncover alternatives for getting the job done. A big part of that, she believes, will be creating collaborative environments where partners readily share information, services and possibly jobs.




The Days of "Do it my way, or hit the highway"Are Over



As a consultant to Canada Post Corporation, Tracey De Leeuw has firsthand knowledge of the need to think differently. The cost of moving products and information across the country is exorbitant, and it has become essential for organizations like Canada Post to make shifts, such as moving from fixed to dynamic transport planning to take advantage of price breaks.




Tracey believes we all have to be more flexible in the future. Wal-Mart, may have the power to dictate to its suppliers, but Tracey believes in adopting more open standards that encourage parties to share information and ideas. "The days of 'do it my way or hit the highway' are over," she added.




We also have to learn to be more patient, to consider costs, and to prioritize our needs. By that, Tracey means we may need to lose our 'instant gratification' mentality, and ask ourselves: Does this need to be instant? Can this take a little longer to get there? Can I split my load for transportation? Does cost averaging make more sense than a per-unit cost in some situations?




In the new world economy, Tracy believes, we must learn to be less rigid, and that can be a good thing. "In supply chain. no one person can be a dictator anymore; it really needs to have a flow, and open standards enable that flow. I think that will keep us flexible and fluid going forward," she added.




The World is Our Procurement Oyster, But...



"Now that we can procure from anywhere in the world," Tracey De Leeuw says, "we have many ethical decisions to make." For example, do you procure from China because you save 10% of land cost, or do you decide to buy American or buy Canadian at the same price, but with very different green footprint impacts, and very different workforce impacts?




The world may be our procurement oyster, but we must establish guidelines that speak to business value as well as the bottom line. Over the past 15 years, we took serious advantage of globalization, but Tracey wonders if it came at the cost of "not paying heed to our own backyards?" And while Tracey is a Canadian, she feels the United States and Canada are facing similar decisions in terms of off-shoring, and weighing cost savings against the "green" costs of moving goods around the world. Taking a long, hard look at a broad range of impacts will help us make positive procurement and partnership decisions across the entire supply chain, she believes... but the decisions will not come easy.




Tracey, herself, has taken advantage of technology resources in Russia, China and Malaysia, where she can pay 5 to $10 for a resource that would cost $50 in North American. The tradeoff, she says, is not having a network within close proximity, which diffuses the value of relationships. "By retrenching and creating tighter, more integrated supply chain relationships with people who are in the same state as you—and I don’t mean 'state' like physical state; I mean they’re also struggling because maybe they have weakened their network as well —I think that’s a risk. a reward, and an opportunity for all of us," Tracey concludes.




Timely, Dynamic and Flexible Procurement



Citing her Canadian Post project as an example, Tracey De Leeuw said, the organization spent "massive amounts of time" executing RFIs and RFPs, with very rigid sourcing requirements designed to match specific deeds to specific suppliers. The process took as long as nine months, and by the time contracts were ready to sign, the organization's needs had changed. Tracey believes we need to change how we procure, so that we can be more timely, dynamic and flexible, and that will mean shedding some of our outdated systems and processes.




Aligning Procurement with "Need and Speed"



Tracey points to a reluctance within large corporate procurement departments to "shave down their power," which means making sweeping procurement policy changes must come from the top and must be organization-wide. Again, Tracey uses the example of the Canada Post Corporation. Because it is a federally owned entity, priority was given to Canadian suppliers, which she believes is a move in the right direction that could be adopted by any company. "Becoming locally entrenched in building relationships, instead of rigid adherence to RFI and RFP processes, is an important lesson for all of us," she said, "because what we learned is that Canada Post's procurement process wasn't aligned with the speed and need of the project."




Online Collaboration Between Trading Partners



Harkening back to the days of electronic data exchange, or EDI, Tracey De Leeuw remembers procurement groups being thrilled to have live and accurate data from which to make buying decisions. Today, she says, there are tools and technologies that bring people, resources and services together like never before.




Collaboration does not have to be limited to individual projects, it is something that can be ongoing and dynamic. Unlike the days of EDI, where trading partners agreed on the vast majority of business processes and legal agreements upfront, which limited the amount of data they could share, today's business environment allows trading partners to share information and ideas online, in real time, which has created tremendous efficiencies.




Leveraging Technologies That Bring People Together



Technology paired with true human collaboration has allowed us to streamline processes. Vendors are not having to wait 90 to 120-days to be paid for their work, which provides the financial stability they need to survive and thrive. The pay-off for larger corporations is the ability to buy from small businesses with confidence, because the risk of financial failure has been greatly reduced by removing the credit burden -- another positive spin on the recession.




Technology is an important aspect of supply chain innovation, and while Tracey acknowledges the contributions of sites like LinkenIn, and to some extent, Twitter, in the context of one transportation company having the ability to "ping" another  with the offer of unused capacity, or something along those lines, she is more excited project collaboration technologies.




Tracey happens to be a fan of Copper, a project management tool that keeps everyone on the same page, and encourages ongoing collaboration. Overall, she likes the idea of bringing vendors, suppliers, transportation teams and customs experts into a virtual room using technologies like e-Works, Copper, SharePoint, Google Docs and others. "They provide project management controls, while fostering an environment where people can communicate and collaborate, without the time and expense of physical meetings," she added.




Going back to the concept of social networking as a business tool, Tracey said, "You're able to find people that you’re interested in talking to by the criteria that describes them, and you can get right to the right person, so I think that's good for procuring, selling and moving goods, as well as sharing information."




Leveraging technologies that bring people together is the key. In other words, it is not what tools you choose to use, it is how you use them. For example, Tracey De Leuuw has been an advocate of e-business in the supply chain for years. In 1995, she was invited to Japan, by Marubeni, the fifth largest conglomerate in the world, to speak to them about the impact of their holdings. If you are familiar with the Japanese style, she said, you know they favor owning the raw materials, the manufacturer, the distributor, the wholesaler and the retailer. In essence, they own 50% of the supply chain, which strengthens every links by buying and selling to each other.




E-business, she says, represents a massive opportunity for improvements in your supply chain by sharing information and streamlining the flow of information. For example, a manufacturer might provide the product description that is being reused by the distributor, the wholesaler, the retailer, and the customer, instead of each one in the supply chain re-creating that work. In conclusion, Tracey De Leeuw, said, "I have long been an advocate for the flow and share of information up and down a tightly integrated supply chain, and I think in times like this, this recession is going to get people to  pay even closer attention to innovations for their supply chain.”




About Smart Speed



SmartSpeed helps companies determine the proper path to profits, performance and productivity for eBusiness initiatives by providing consulting, planning, analysis, design and development services. For additional information, visit




About is a small business marketplace and commerce platform where buyers and sellers transact securely and collaborate on service delivery using Biz.gigs for ease and quality assurance. For additional information, go to




Meet Tracey De Leeuw:


Tracey.jpgTracey De Leeuw has been an e-business strategist since 1993, and is the CEO of Smart Speed and Among her many accomplishments, Tracey is credited with starting Canada's first integrated retail and business-to-business transaction processing environment in partnership with our Royal Bank of Canada, Canada Post Corporation, Manitoba Telephone Systems, and the federal government. Tracey specializes in process improvement through digital connection, and most recently, her work in the logistics and supply chain area has been with Canada Post Corporation, where she is tasked with revamping the way Canada Post moves mail by leveraging new equipment and new information processing to achieve overall efficiencies.

Challenges of Procurement in South Asia



The key procurement challenges in south Asia, in particular Pakistan and Southeast Asia, center around the lack of structure.  While in the US and Europe prices are pretty structured. There is a structured pricing method whereby the seller has an idea on the appropriate pricing. The purchaser also has an idea on how the pricing works and how to approve them. However, in South and Southeast Asia, purchasers face the problem of lack of standard prices. Regardless of the commodity, every time you go out to purchase, you need to go through the negotiation cycle again. The market in this part of the world has not reached the level of professionalism which is should be at. In the US and Europe the market has really grown up, with professionalism on the seller and purchaser side.


In established markets you have standard prices built in and there is acknowledgement of standard prices. In South and Southeast Asia there is no acknowledgment of standard prices. When a purchaser goes to this region the main challenge is that there is no fixed and acknowledged price on both ends.  The negotiation has to be done from the basic beginning and taken up to the end.  This is the main challenge a purchaser faces in this market.


Factors Driving Negotiation in the Region


One of the key factors that drive negotiations are:


1.       Volume

2.       Frequency of buying


The higher the volume, the better pricing you will get. The lower the volume, the less chances you have a getting a good bargain. It is necessary for a purchaser in this region to have the whole year of purchases planned properly.  If the right type of planning has been undertaken he will be able to go to South and Southeast Asia and do the right type of bargaining.


For example, when going into the market and holding your requirement at 30,000 units, rather than going for negotiations every time for 5,000 units , you should bargain for the whole lot 30,000 units for the year. This can be done with the right planning. This will increase your chances of getting good service levels and prices.


Challenges of Procurement in Pakistan


The market is not well established in Pakistan, both on the procurement and seller sides. Similar to the challenges in South and Southeast Asia, there lacks standard established pricing. Everyone has their own pricing for their own products. You need to re-invent the wheel every day – for the complete cycle of negotiations. The market as mature as it should be at this time in history.


When purchasing in Pakistan you should have a basic knowledge of the product you are buying. You need to know both the international price as well as what the local market price should be. If you don’t know these things it will become very challenging. Every time you enter the market the seller will try to take the maximum amount out of the deal. The purchaser needs to do his/her homework and have a good market knowledge.


The Role of Inflation in Negotiations


Inflation has been increasing world-wide. In South Asia inflation has been high for the last few years. The average inflation rate in Pakistan is roughly 25%. Due to high inflation and associated high raw materials prices the purchaser does not have the chance to negotiate a good price out of the whole deal.  While the seller can be making a profit, they are under pressure due to rising raw materials prices. The purchaser does not have a good chance to do a proper negotiation.  As a result, the purchaser’s performance declines.


About Atif Moin


Atif Picture1_edited.jpgAtif has been working in the professional market for the last 12 years, with roughly 10 years experience in procurement. He worked in the Telecom industry for 8 years.  He spent 5 years  he did contract management  and purchasing .  For the last 3 years he has been working at Syngenta Pakistan as the head of procurement for supply chain where he deals with a wide variety of products, including chemicals and machinery. 



LinkedIn Profile

Dr. Dasgupta—who goes by Dr. Das in the industry—is an Executive Vice President and Partner of Xavor Consulting, based out of Orange County, California, in Irvine. Dr. Das believes in a workshop-driven approach to organizational transformation. The workshop process includes the forming of cross-functional and cross-hierarchical teams to solve problems led by Dr. Das.



Learn more about how the workshops are conducted and the results which range from forty-nine million dollars of projected savings over a period of two years, all the way up to paying several times over for the SAP or Oracle implementation that companies have done. Most importantly, the workshops get the vision socialized across all functions and levels in the organization. This is why, in Dr. Das’ experience, that he thinks organizational transformations of a large size must use this type of workshop approach.






Need for Organizational Transformation Workshops



Over the last fifteen years Dr. Das has been working in several capacities, such as management consultant, program manager, business analyst or a strategist. He has been typically brought into large organizational transformation projects where either a company is going through a merger & acquisition, an ERP implementation or they are doing an overall tuning up their global supply chain management process design. Typically, in the case of every expensive ERP implementation, such as SAP or Oracle, it requires people to act a certain way, which results in the addition of a few non-value added activities to the implementation. The expected commercial benefits will not be realized after such an implementation unless people do certain things in a certain way. The logic in the algorithms are actually incorporated and tailored to the specific business needs of that organization.



In these cases the organizational transformations have been led by or assisted by us. We may be working with the C-level executives and their middle-level management through a series of workshops to make sure that a blueprinting be an “as-is” versus a “to-be” vision. We help to ensure a socializing of the vision, the processes and the business logic. This enabling is carried out by us through a series of workshops where people from different levels of management and different functions of the organization are in attendance. They themselves take ownership of those processes aided and supported by us and intellectually fed by us through our research and best practices so that they can perform those tasks and activities.


A Workshop-Driven Approach



In most cases, senior management has a vision of what they want to do, and they try to communicate that through several channels, such as company-wide announcements and mirrors of meetings cascading down to the lowest levels. By the time it reaches the doors, the message is lost, and no one really has an ownership of the message, which is why we have seen several multimillion-dollar projects of organizational transformation or ERP systems, et cetera, that have completely gone down the drain.



We specialize and focus on a workshop-driven approach. We bring in our team of consultants and experts based on our best practices knowledge and experience, as well as our ongoing research through the university network that we are associated with. We then engage with the middle management layer that should be reporting back tasks and project plans to the top management. Middle management also presents an ROI and Benefits Analysis that is needed to be done before actually laying the design out for the implementation.



How Workshops Are Conducted



We come up with a session plan that is designed and tailored to each and every client. For example, we may plan ten or twelve sessions, each lasting three or four hours depending on how deep and wide they want to go into the transformation. In those sessions we actually bring the top leadership to do a part of it. We then hold team presentations. The teams are formed cross-functionally. For example, even if it is a global transformation that is predominantly from the software side, we have people from finance, accounting, sales, marketing, operations, strategy and IT forming cross-functional teams. They are also cross-hierarchical. We put each team together with some people from the trenches, some in the middle management, and some from the top management. We then divide the teams with problems that they take up and that need to be addressed. They identify the low-hanging fruits and a design on how this will be done through a set of business releases. They basically read the material that we provide to them. The discussions and brainstorming is led by us. We conduct root-cause analysis. Then they present this back to the senior management.



The action is actually in the hands of the level-two folks who have a desire to grow, to be promoted, and who have a desire to see the company be successful. Therefore, there is a lot at stake if they don’t do those things. Therefore, once they take ownership the company really benefits from all sides. This is why Dr. Das believes the workshop approach provides them that platform to be able to prove themselves, come with a plan, and get a lot of visibility and support. Most importantly, it gets the vision socialized across all functions and levels in the organization. This is why, in our experience, that we think organizational transformations of a large size must use this type of workshop approach.



Workshop Results



Results reported by clients have been anywhere between forty-nine million dollars of projected savings over a period of two years based on these transformations, all the way up to paying several times over for the SAP or Oracle implementation that they have done. This had been counted after the implementation was over. A year or two passed by to prove that this kind of approach actually works. It was actually tangible in dollars and cents, along with a lot more employee retention, empowerment, and a lot less frustration in the trenches. Senior leadership also felt that they were heard and their vision was embraced; middle management felt that they were ready and that they had essentially earned to be promoted to the next levels. Overall, according to the feedback received from senior management, the company’s health from an employee satisfaction perspective significantly improved.



About Dr. Dasgupta


DrDas.jpgDr. Dasgupta—who goes by Dr. Das in the industry—is an Executive Vice President and Partner of Xavor Consulting, based out of Orange County, California, in Irvine. They are a niche management consulting firm that focuses on global supply chain management and organizational transformation and leadership. Additionally, Dr. Das is an adjunct professor in the Paul Merage School of Business at UC Irvine, as well as an adjunct professor at the Peter Drucker School of Management in Claremont Graduate University. At both places he teaches M.B.A. classes and courses in global supply chain management, operations management, quantitative business analysis and sustainability.


Dr. Das’ core competencies in supply chain management are both detailed and rigorous as well as process driven. The detailed and rigorous aspects include mathematical quantitative elements of supply chain management, such as inventory management or forecasting algorithms, demand management and demand management processes. His process-driven approach includes setting up, designing and rolling out a sales-and-operations-planning process, Lean Six Sigma, Vendor-Managed Inventory, CPFR (collaborative planning, forecasting, and replenishment processes) and working primarily with the consumer-packaged goods, retail, high-tech life sciences sectors, as well as manufacturing overall.




LinkedIn Profile:



You may have read about the Boeing 787, which is the next generation jet which Boeing has under development. Boeing decided to take a very radical new approach to the design and sourcing of this plane. Rather than doing the traditional process of creating specifications for each part and sending them out to their suppliers for negotiation on design, Boeing put all of their key suppliers on a network and asked them to take a more active role in creating specifications and asking them to be more proactive.  Instead of Boeing telling them what the best specifications should be, they allow the suppliers to come back with ideas. It is an interactive process where everyone can collectively get all of the pieces put together. Boeing still plays an important part as the ultimate controller of the process. The idea is to increase the amount of innovation and knowledge coming through the system.

The Boeing 787 is about totally re-thinking the supply chain by integrating it more directly into the company. Some people feel like Boeing is letting go of its knowledge. However, Mary Adams believes that Boeing is actually increasing its knowledge because they are getting better work out of their suppliers, which is not an easy thing to do. Right now in the press and blogosphere people are really criticizing Boeing for this. There are 2 streams of criticism:


1.       Boeing has totally screwed up. The project has been slow, with problems and delays. You can say this was the stupidest thing they ever did. Others think this is the smartest thing Boeing has done. Mary believes in this way of looking at things because they are learning these lessons years or even decades before a lot of other companies are thinking this way. Mary believes we have no choice in the knowledge era but to find a way to maximize knowledge. Boeing as a company cannot maximize on its own the knowledge of every component and possible innovation that can happen. Boeing instead wants to harvest the knowledge rather than resist it.


2.       By doing this is Boeing losing knowledge? This is another thing which is very important in the knowledge era. The control of knowledge has its disadvantages. There are certain aspects of your knowledge and intellectual property which you have to protect because it gives you such a compelling competitive advantage.  However, the mere act of protecting and building a way around your knowledge means that it is not available for collaboration. Collaboration is key to innovation. Companies have to find ways of sharing their knowledge, otherwise it just remains within a small certain within your own company. The potential of maximizing it is much less compared to when you are involving your other partners in your supply chain.

People are concerned about giving knowledge to China because we will never get it back. In some instances this is true. However, you need to think about the instances where the knowledge would multiply and you could be a part of that community which is creating knowledge. This is a different mindset that Mary thinks Boeing understands. She believes Boeing will someday be looked at as a real leader, notwithstanding the challenges and criticisms they are facing right now.  Ultimately, they will be creating a community where you can have great amounts of innovation in their industry.


Examples of knowledge multiplying with collaboration


Almost any software company is an example, such as the Google search engine. The search engine gets better with the number of users who participate. As more people use the Internet and Google there is more data to drive searches on Google. The more users you have for your software, the more valuable your software becomes. You learn from the users. They find bugs, suggest improvements and help you think of other uses for the software. Having a broad community means you have a smarter network and much greater potential for innovation.


This is the really interesting thing about knowledge. If you share knowledge you don’t lose it unless there is some magic to what you do (sometimes knowledge has to be patented and protected). Most knowledge is better off if you are willing to share part of it because it multiplies. If I sell you a piece of software it doesn’t mean that I know less. It is not like selling out of an inventory of shirts in my warehouse, for example. If I sell you a shirt, the inventory will reduce from 100 to 99. However, if I sell you a piece of software, my software inventory (the knowledge, which is the critical part) it doesn’t get reduced. There is actually a potential for increased value because of the number of users.


Ways to classify knowledge


There are some people who talk about tacit and explicit knowledge. They are focusing mainly on the human capital side of things.

The way Mary and her company looks at things there are 4 categories of knowledge in an organization.


1.       Human Capital– the magic of human beings and the human brain which helps renew what is going on in the organization


2.       Relationship  Capital – This speaks directly to the supply chain. The more you are sharing knowledge with your vendors and partners, the more this becomes a significant part of your knowledge capital. The more you are interlinked with systems, the harder it is for people to switch. Relationship Capital is one of the biggest sources of risk that organizations face because you are relying on people in your supply chain and partners to do things for you. If they make mistakes, such as using lead paint or use dangerous ingredients, you are at risk. However, Relationship Capital is a critical part of knowledge.


3.       Structural Capital – This is knowledge that has been captured and stays in the building when everyone goes home at night. This is what everyone misses about the knowledge economy.  They always say our knowledge goes home at night, but this not correct. If you are doing a good job you are taking your knowledge and turning it into repeatable processes, systems and information sources. All of the tools on your desk which you are using and which someone else can come in and use are part of the Structural Capital of an organization. Software is a good example of that process. In a supply chain, to the extent that they are in a useable and re-useable form, all of the systems and processes for tracking and information about vendors, information on customs in different countries, etc., become scalable and are the most powerful part of your knowledge.


4.       Strategic Capital – How does it all fit together? How does what you do related to the world outside? What is your knowledge and understanding of external factors? How do you create a business model to serve that? When talking about bringing a message to people about the power of their intangibles and taking that 80% and managing it clearly and specifically, we are talking about starting with a list of what these key knowledge assets are and making sure that they are in your measurement systems and that you are evaluating them on a regular basis.


Business Architecture


Not being an insider to what Boeing is doing, Mary understands that they have built a robust network where each supplier has their presence and have the ability to share things with the group. There are places to host conversations and collaborations. She does not think you have to have a technology collaboration platform to do this. Collaboration has always been around, but if you have good technology tools you will multiply the effect of the network and how collaboration takes place.




What Boeing did is very radical and may be more than most people are willing to take on. Mary suggests to think about the elements Boeing has implement. One of the biggest of these was rather than pushing out specifications (and this is not a black and white thing without guidelines) to vendors and saying “here is what we want”, they are asking the question “what do you think we should have?”, “what is the potential for this?”, “how can you make it better?”. The simple question is opening up a conversation that a lot of people don’t have with their partners and vendors. While there are some people you obviously will not want to ask these questions to, all of your critical vendors should be partners and you should be having a conversation with them. This is the place to start. If you can change that mindset and take this step then the rest of it will happen over time. It won’t be easy, but this is the challenge we all have. We know that the future of our companies and our economy is not going to come from doing the things the way we have in the past. We are at real cross-roads in terms of the shift into the knowledge era. To succeed you have to begin to open yourself up to some basic concepts. One of them is that knowledge grows when it is shared and when there is collaboration.


Innovation is more than the next buzz word. The economic necessity of the knowledge era is to constantly be learning and creating and building on your knowledge.


With most of these intangibles, people know that they are there but they are not measuring them systematically. Mary’s company helps people do that. She has an online community which was started one year ago and now has 250 members from around the world in the field of intangible capital. The name of the community is called the IC Knowledge . Anyone who joins and sets up a profile can post questions and engage in conversations with others. Mary believes it would be interesting to get more supply chain conversations because supply chain is where you see Relationship Capital at the center. However, we have to understand all of the components: Human Capital, Structural Knowledge and Relationships.

You can learn more about these concepts in Mary’s book titled Intangible Capital The website has a number of free downloads, including a document with all the exercises which walk you through to creating a to do list for managing your intangibles. 


Mary also recently posted the IC IQ on the lower left hand corner of the Intangible Capital Book site, as well as on her blog which is Smarter Companies The IC IQ is a free assessment with 20 questions. It takes about 5 minutes to see how you are doing and the strength of the intangibles in your organization. The 20 questions give you an introduction to the concepts in the book. You can download a report on the thank you page. You can also get a full assessment with you answers upon request.




As much heat as Boeing is taking right now, someday soon people are going to be saying how daring and smart they were. At some point in our careers we will be at a point where we will either be ahead of the curve or behind it. A really good way to start is to think about how to have these conversations where instead of saying “what we want is”, you ask your partners and suppliers “what should we want?”, “what should we know?”, and “how can we do this better together?”.


About Mary Adams


Mary is a management consultant who has founded two firms since she began in this business in 1999. Before this she was a high risk lender. She comes from a very quantitative world of hard data and real money. In recent years she has become very interested in the role of intangible capital in our economy. Today 80% of the value of a company is actually intangible, which means it is not on the company’s balance sheets, it is not well defined and is not measured well. This leads to a lot of bad decisions by people.  Mary recently published a book called ‘Intangible Capital – Putting Knowledge to Work in the 21st Century Organization’ . Mary’s company is on a mission to help people see their intangibles and make the most of them. This is what we need to get the economy going.


See: Over 70% of a Company's Value is Intangible

I recently interviewed Tom Bryant where we discussed supply chain risk and risk management. Hear Tom's exciting stories involving supply chains for the offshore energy industry in very remote regions of the Arctic and an outdoor equipment start up who's cargo ship with the first delivery of their product left SE Asia with their items in a container. Somewhere in their container’s journey it was washed overboard along with dozens of others. A not entirely unknown event in marine cargo history.


Q. Why is supply chain risk becoming so important today?


A. Supply Chain risk and risk management savvy have been around since the first land and water trading routes were established millennia ago.  And while the fundamental issue has not changed – a potential for interruption in the supply line’s ability to continue a normal flow of commerce - the modern age’s rapidly maturing communication, logistics tracking, and transportation advantages have brought new peril for the supply chain arena.


Outsourcing, Lean manufacturing, Just in Time Inventory… all terms that speak of growing efficiencies.But for every efficiency comes a parallel risk as the supply chain gets leaned out. You may be aggressively competing in global markets because of your best in class practices, but your Supply Chain may be strained to the bursting point. And if it fails, the losses can mount rapidly.  Fortunately the range of tools to offset this risk has grown also.


Q. Can you give me an example or two of the problem?


A. Let me paint two stories in very different parts of the world to give a sense of the perils. The first will demonstrate the ever present pressures but from an industry specific perspective and the second will give you a sense of the specific impact but from the experience of a new business confronted with supply chain risk. Afterward let’s talk about what can be done to manage these general and specific risks in the 21st century.  


My first experience of supply chain risk dates to more than 30 years ago when I worked in the offshore energy industry in very remote regions of the Arctic. I spoke to a colleague from those days recently. He is currently building structures on the seafloor in the Kara Sea at the northernmost end of the Ural Mountains-Western Siberia. The issues are not dramatically different all these years later- even with SAT phones, GPS, computerized inventory scheduling, globalization, and much improved tools for managing risk. For it is tenuous to string supply chains out in a harsh environment at the end of a complex and long supply chain.


30 years ago the supply of spare parts kept nearby was larger and consequently more expensive to maintain. We were busily developing an oil and gas field far out on the ocean primarily during the ice free summer months. But the season was, even so, year round for elements of the exploration and construction companies involved. And we could not regularly resupply by ocean freight or river barge earlier than July nor later than November- just 16-20 weeks of the year.


On either end of the open water season were 8 week periods of unstable ice conditions - rotting ice in the spring and newly developing immature ice in late Fall- in which the only transportation was by helicopter. And that left at best just 14-18 potentially fruitful weeks of stable ice conditions for heavy resupply 24-7. A tenuous supply chain I think you would agree.


So most of the resupply was done by truck - by far the most economical option though it too had its perils in those regions. And we definitely kept more items than we needed in basecamps in the north for fear we wouldn’t be able to get what we needed in a timely fashion. Landing strips were of a rudimentary sort- part of the season even involved crew change and resupply by 737 aircraft with tundra tires -landing on strips plowed on the ocean ice!  Keep in mind, certain high value, high urgency items always traveled by Hercules and Caribou rear-entry heavy transport aircraft - but as you can imagine this was a vastly more expensive venture used only when absolutely necessary.


Logistics and supply chains in the energy industry have often relied on a combination of these two methods: the first - a predictable pre-scheduled flow of vast loads of resupply (mostly parts, raw materials, and specialized equipment) while the second is a timing dependent reliance on emergency solutions. “Hotshot loads”  or global expediters to get high-expense critical parts to remote countries “most tricky.”


Even whole drilling rigs sometimes move via heavy airborne operations on an urgent basis when no other means is available. The fundamental truth of the industry is that globally we produce just a hair more supply than our worldwide demand right now- @80M barrels of oil a day - give or take. So globally it is too often a ‘seat of the pants’, by ‘whatever means necessary’ supply chain issue that has vast sums of money thrown at it to keep it all moving.


A luxury very few industries can contemplate today. But the critical nature of managing cash flows and ensuring the life of a company while perhaps different in detail from industry to industry, it is not different in the overall picture whether it is your local lumber store, an aircraft manufacturer, or a cutting edge IT hardware distributor. Events like strikes can force industries, facing severe cash flow issues, to stare “over the precipice”, concerned suddenly about potential disaster. Knowing the time value of money, they are well served by smoothing supply chain risk with various tools we shall touch on later.   


The other story begins in the Western US where two friends dreamed of and worked toward launching a specialized outdoor equipment company focused on climbers and outdoor enthusiasts. This story is perhaps more poignant in painting the critical nature of managing supply chain risk as a critical element of survival. The friends designed their specialized gear and began the rounds of VC circles with their dreams and business plan, and knowledge of what other outdoorsmen valued in equipment while hanging off the sides of mountains in all weather conditions. They quickly determined that while they wanted to retain some of the manufacturing capability in the US they could only compete by developing international supply chains for elements of their business. And so they identified and contracted with a mfg co. in SE Asia, satisfied themselves with both the quality of the product that flowed from their design and the reliability of the supplier who put together an on-time first order of several thousand items.


And here is where the supply chain issues collided with their vision.  A cargo ship with the first delivery of their product left SE Asia with their items in a container. Somewhere in their container’s journey it was washed overboard along with dozens of others. A not entirely unknown event in marine cargo history.


While the terms of the delivery did not expose the two friends to a property loss it did expose them to a net income loss as they were uninsured for the interruption to their own selling cycle. The Asian factory owner on the other hand was in much worse shape. Uninsured for the property loss he was bankrupted by the event - even though cargo coverage would have been easily obtained and this would have been shared amongst the other container shippers typically according to the provisions of marine general average language in a traditional cargo policy. The net income loss of the two friends was less severe but no less frustrating. They were unable to fulfill orders and take advantage of the considerable momentum they had developed with their financiers. Spreading their risk or transferring the financial implications was far from their minds at the time they began their business, and the risk control and risk finance tools available were blunter than they are now. 


Q. How have supply chain issues been traditionally handled by insurers? And how is it changing?


A. Some form of supply chain coverage has normally been covered as a business interruption exposure. But this requires physical damage at the insured's property to trigger a related net income loss – an interruption to production or business activity and thus a business interruption claim. For example, a Factory is destroyed by fire. Production grinds to a halt while arrangements are made to resume activity. Business Interruption coverage fills the gap.  Or in some cases contingent business interruption may trigger where the physical damage is to a supplier’s location for example. But that supplier simply failing to meet a contracted shipment would not trigger the BI coverage as a net income loss if there is no physical damage responsible for the failure to deliver.



But this is changing. Civil unrest, transportation strikes, involuntary and voluntary product recalls and even the recent eruption of the Icelandic volcano – all incidences of supply chain interruption not based on physical damage to the insured’s property or that of a contingent location, have all sharpened interest by business and insurers to address loss due to issues out of the control of the insured. And where risk rises and can be quantified over a large enough body of information, risk transfer solutions are usually not far behind.



Q. How does globalization play into this?


A. Adding further complexity, globalization (and the complexity of delivering highly specialized components on time) has added to the strain.  Airbus- the EADS subsidiary story, as it relates to their new A380, illustrates the problem.  Major sections are built in France, Germany, Spain, and the United Kingdom. They are moved to the assembly site in Toulouse by surface, by water and by use of the specially designed A300-600ST Beluga aircraft.  Suppliers come from around the world and some of the largest include United Technologies, General Electric, Goodrich, and Rolls Royce to name a few.  A fleet of roll on roll off barges and ships and specialized port facilities and modified roads were designed to accommodate the needs and the logistics routing as the assembly occurs between these sites is formidably complex. While perhaps this is a particularly complex example, most businesses with supply chain risk can imagine the risk that comes with the loss of production, or interruption to service.  An event of non physical loss can easily be imagined even if quantifying it is somewhat more complicated to put into hard numbers. 




Q. What are the risk tools that can be used?


A. Well let’s talk about general tools available to manage these increasingly complex risk issues first and then going back to our examples let’s apply them to the example of our manufacturers of high end mountaineering equipment.  Risk Control techniques are well known of course, as are Risk Financing techniques.  But where avoidance of the risk is not an option and loss prevention and loss reduction techniques have been optimized, the tool belt gets a little more confining. Choices include separating key activities to spread risk, duplicating activities to create a backup “understudy” ready to roll in an emergency.  However even so, the volcanic interruptions idled Nissan factories waiting on pneumatic sensors from Ireland after only a few days due to the dependence on ‘just in time’ supply of parts.  And while diversification can spread the risk to a large corporation it doesn’t much help a unit exposed to loss of production. The entity may survive but the business line’s reputation may be irretrievably damaged.


Fortunately the tool belt still allows for some valuable decisions in the form of risk transfer tools including retaining risk at a tolerable level for predictable events at a certain retention or deductible level.  And what can’t be safely retained may often be partially or totally transferred again depending on appetite for risk.


Somewhere along the way an organization may come to the conclusion it is time to do a thorough supply chain assessment and to evaluate the evolving insurance solutions available depending on the frequency and severity of the potential risks considered.


Non-physical damage insurance policy wording is often negotiable now and events as diverse as supply stoppage, interruption of service, or loss of a supplier whether arising out of perils like natural events, political risk, strikes, and other delays may well be identified, underwritten and transferred for a premium.  Specifics may depend on the nature of the business activity, the geographical areas of the supply chains, the stability of the suppliers, the means of transportation, and the size of the business. Often the new coverage is written as “all risk” which has few exclusions though the risk may be limited to named suppliers and named supplies with the goal of helping you contain costs, improve cash flow and solidify the value of your supply chain. This can be a strategic advantage for corporations in an era in which corporate responsibility may be struggling otherwise to ensure profitability while meeting a myriad of other corporate responsibility concerns.


In the case of our two young entrepreneurs, while the liability issues associated with their product might be somewhat specialized to cover, the net income loss potential in their supply chain particularly as relates to a simple product such as a specialized climbing bag might present little problem. While the size of their startup could make coverage impractical on Day 1, precluding immediate coverage, an assessment of their risk might determine a revenue point beyond which retaining that coverage might be a growing concern. The Vietnamese manufacturer of course could have been protected from his physical loss fairly simply through normal cargo policy sparing a great deal of financial loss. 




Q. What about product recall insurance?                     


A. This is another related and developing area of supply chain risk which, depending on the type of your product may be covered to address the associated expense of notifying customers, dealing with 3rd party liability, removing product from the marketplace involuntarily/voluntarily where policy triggers are met, disposal costs, costs for a 3rd party to replace your withdrawn product, and even costs to rehabilitate 3rd party brand reputation and other associated areas that can be added by endorsement where your product is a component in another manufacturers product and impairs property or leads to a refund, repair, replace scenario.  An obvious trigger would be a government body recall order but a voluntary recall could be tailored in the policy language in some cases as a “covered event” in cases where use or consumption of the product poses actual or imminent danger of resulting bodily injury.  Some product exclusions may include implanted medical products, explosives, aircraft and automotive parts and nuclear materials to name a few. However the meat recalls of recent years could have been covered as could recall of vitamins, games/toys, firearms, safety products, computers, and furniture to name a few.


Q. What’s ahead for supply chain insurance?


A. We can only say that innovation and efficiencies are keeping pace with technology and that the 400+ year old tradition of risk transfer is healthy and disciplined in evaluating new ways to support business growth and stability. If you have questions about how you might proceed with a comprehensive supply chain assessment and identifying appropriate risk transfer tools please feel free to reach out to me.


Q. In closing tell us a little about yourself Tom.


A. My career has spanned three areas of expertise including Energy, Public Safety and Insurance. While these areas may at first seem to have little in common, in fact they all share a heavy risk component. They also share a structured approach to risk assessment, risk mitigation and their accompanying financial implications. So for me this path has been a continuum and a progressive and passionate interest. Beginning on the drill floors of Western Canada and later on the Beaufort Sea (Arctic Waters,) I have continued to work in Exploration & Production activities, mid to downstream ops, & adjunct roles (risk/insurance) for projects from the Arctic to GOM, South America, the Far East, Middle East & EU in the ensuing years.

Since 2004 I have built on these diverse experiences by assisting clients with complex risk issues in the fields of Traditional & Alternative Energy, Manufacturing, Distributing, Marine, and Investment Groups/Hedge Funds.


I am a LICENSED PROPERTY/CASUALTY BROKER and hold an ARM designation. I have produced and bound coverage in all P&C lines, and complex surety. I have also worked with layered/shared placements and developed global partners to support these needs. I have done this in NATIONAL TEAMS and BOUTIQUE INTERNATIONAL BROKERAGE/CONSULTING roles. My hallmark has been a curiosity for client businesses and an interest in their success. My current interests are enterprise risk management, the intersection of insurance & social media, and applying interdisciplinary best practices to lead not lag client needs.




Tom Bryant   Director Meridian Consulting Group- Boston


I interviewed Mary Adams, president of I-Capital Advisors, a consulting firm that focuses on helping clients understand and increase their intangible capital. Intangible capital can be managed as a network made up of three parts: human capital, relationship capital and structural capital.  Optimizing intangible capital involves transcending linear process views and improving upon automation and integration mechanisms.  This applies to supply chain innovation since none of the elements can be used in isolation.


We discussed Holistic Network Mapping for Easy Asset Management.




Main Points


·        Mary Adams, co-author of Intangible Capital asserts that 70% of the value of an average company is “intangible,” yet often overlooked or underestimated. Her company helps clients leverage intangible capital and maximize assets.


·        Human capital, the network relationship and all the processes and disciplines involved in structural capital are also important to the supply chain, particularly when you see that none of these can be used in isolation, says Adams.  The three categories of intangibles work together as a holistic system. “You’re not just managing a single process; you’re managing a network.”


·        “Our clients are always completely changed in their outlook after they work with us, after they understand the potential of their intangible capital,” says Adams


“A successful business model is never about just one thing. It’s a network of relationships that will not work if you take away any of its key pieces. Every business model/intangible capital system needs a combination of human, relationship and structural capital.”



Over 70% of a Company’s Value is “Intangible”



Mary Adams, CMC, is an expert in optimizing intangible capital. Mary explains how as consultants, her company, I-Capital Advisors, helps others to leverage their intangible capital, resulting in increased levels of performance, value and innovation.  According to Adams, the average company, regardless of its size, industry or geographical location, has a tendency to overlook and underestimate its intangible capital potential.  “That means that it’s not accounted for on the balance sheet,” says Adams. And it should be, because “over 70% of the value of an average company is ‘intangible.’” For instance, if a company is said to be worth $10 million, and the net book value is $3 million, the intangible capital is that remaining $7 million.  It consists of the building of the company itself, its reputation, unique processes and systems.



Intangible Capital: Three Categories of Assets



Mary Adams explains how to recognize and evaluate intangible capital. Each organization has three sets of assets: human capital, structural capital and relationship capital. Human capital is the knowledge and experience that the employees possess. “And you want to have good human capital; you want to have the smartest people you can,” says Adams.  Relationship capital is all the shared knowledge that comes from partnerships, customers, industry associations - all the external sources of knowledge that feed and support an organization.  Adams emphasizes, “Talking to people in the supply chain space, certainly, you can appreciate the importance of relationship capital.” The third asset category is structural capital, which “is really where the magic of the knowledge economy is best understood.”  Structural knowledge is all the knowledge that gets left behind or becomes an intrinsic part of the company when the employees go home at night.  It includes databases, software, processes and procedures, all the intellectual property.  The structural knowledge is the most scalable category of intangible capital. “Once you get a process or system working well, it’s pretty easy to grow it because it just involves adding another server or scaling up the size of the operation,” says Adams.  “This is where companies can get huge returns.”  Each improvement made to structural capital makes everyone in the organization smarter because the global share of intellectual capital has increased.



The Holistic Network of Intangible Capital



Human capital, the network relationship and all the processes and disciplines involved in structural capital are also important to the supply chain, particularly when you see that none of these can be used in isolation, says Adams.  The three categories of intangibles work together as a holistic system. “You’re not just managing a single process; you’re managing a network.” Adams explains that process is an important part of every company’s story - one that most managers aren’t trained to think about. “A successful business model is never about just one thing. That’s the reason that it makes sense to create a drawing of your intangible capital: to show all the elements of the inter-related system that your company uses to create value for your customers. The system will not work if you take away one of its key pieces. And every business model/intangible capital system needs a combination of human, relationship and structural capital.”


Adams has recently co-authored a book with her colleague, Michael Oleksak, named, fittingly, Intangible Capital. She says that one chapter in particular might be of interest to supply chain managers - it’s about mapping networks and transcending linear process views.  In addition, if you look at the prevalence of automation and the information technology within a company, to date it’s been concentrated inside firewalls, and the concepts of the three categories of intangible capital assets and networking can really benefit organizations by helping them to expand intellectually thereby improving integration and automation. Adams emphasizes that optimizing intangible capital assets will result in big opportunities in the coming decades.



To maximize intangible capital opportunities, I-Capital recommends a practical approach.  First you evaluate your assets and deposit them into each of the three categories.  “A good place to start is think about what your core processes are, and in supply chain you have a very clear set of processes that you’re wanting to manage.  Make a list and then think about the competencies that are required to support that; what are the relationships, the networks?” It’s also a good idea to sketch out a diagram because once everyone has a visualization in mind, it’s easier to talk about how the pieces fit together.  The next step is talking about metrics and goals because each member of the team has different metrics that they’re following.  “Once you have this systemic view, literally a big picture, you’ll see other areas where you can create a global set of metrics to help you manage proactively,” says Adams. She recommends looking at some case studies offered on the I-Capital blog. There are also many downloadable resources for readers of interest.



About Mary Adams           


Mary Adams.jpg


Mary Adams is principal at Trek Consulting, LLC and president at I-Capital Advisors, a dedicated practice within Trek Consulting.  She is also a Certified Management Consultant (CMC) with over 11 years experience. Her background, prior to that, was in finance, specifically in high risk lending. Adams has recently co-authored a book, “Intangible Capital”, which is a guidebook to the economy of the 21st Century. I-Capital Advisors is dedicated to helping technology and service companies grow and prosper by understanding and leveraging their intangible capital.


Mary on LinkedIn



I recently interviewed Thomas L. Tanel President, CEO, and founding Principal of CATTAN Services Group, Inc., a Logistics and SCM advisory, counseling, and training firm. Thomas shared his views on supply risk management.

1. Why is supply risk management important now?


The uncertainty and economic turbulence of the last two years.


The experience of managing supply chain risk across oceans and continents is daunting for many organizations.  As these organizations have outsourced or low cost country sourced to developing countries, they unknowingly have taken on greater exposure to risks and uncertainty. This distance-based supply chain, whose links are forged by many supplier tiers in various countries, carries a risk in that the longer and more diverse it becomes, the more it is susceptible to unforeseen circumstances.  The supply chain is rendered fragile, extended and distended in some way.


According to a multi-year analysis of suppliers to Fortune 1000 suppliers conducted by CVM Solutions, the 2010 study shows that the overall number of relevant and highly used suppliers is significantly smaller than many believed and decreasing at a faster pace than in previous years. This trend leads us to believe that there is a Darwinian effect occurring in the supply chain as Fortune 1000 companies cut weaker suppliers and replace them with stronger ones. Although the overall trend is downward, the study also noticed that new suppliers were being added as well, potentially resulting from the fact that customers were ceasing business with weaker suppliers and replacing them with stronger ones.


For those that frequently buy from smaller, and potentially more vulnerable organizations, you need to be on the lookout for symptoms that a supplier might be unable to weather the current financial storm.


As we face the potential for a shrinking supplier base will this also impact supplier capacity to meet customer demand.  In addition, the smaller, independent suppliers are going out of business or being discontinued, while the big supplier corporate families seem to be getting bigger through mergers and industry consolidation.


What does this do to our supply risk and the increased supplier risk dependency?  How do we assure ourselves of supplier viability and financial health in light of these trends?


2. Who needs to pay attention to supply risk management?


On average Fortune 1000 companies are managing risk for less than a fifth of their suppliers, new research claims. The poll conducted by SIM software and services firm Aravo, found that more than half of the financial, procurement, and risk executives polled from Fortune 1000 firms have less than 20 per cent of their supplier base under active risk management.  A significant number of those polled (71.4 per cent) expressed that their biggest concern continues to be risk of supplier financial viability.


By way of example, cash has flowed more slowly through supply chains than in the past . This reflects longer payment periods among suppliers, transporters and customers, according to the 2010 Supply Chain Index released by Cortera, a business credit bureau.


Closely monitoring the financial health of suppliers has become an important part of the job for anyone involved in a company’s procurement sourcing efforts. During these tough times, relationships should be a truly collaborative process, with the supplier communicating any anticipated failure or disruption well in advance.  A solvent supplier yesterday may become an insolvent supplier today. While supplier insolvency is a known risk, the economic downturn brought it to the forefront.  To weather this and future storms, organizations must focus on a proactive approach to better anticipate changes in supplier viability and financial health.


Mounting supplier viability concerns require a comprehensive audit around supplier risk with a scorecard that provides valuable guidance for supply base rationalization decisions and maintaining the “health” of key suppliers.


According to a recent research project by the Procurement Strategy Council (PSC), procurement organizations pay, on average, an additional 4% to resolve a supply incident stemming from supplier financial distress. What specifically accounts for that 4% cost increase?  According to the PSC research, the real cost of poor supplier risk management includes: supplier product line or facility closures; reduction in quality standards, and supplier layoffs and bankruptcies. Multiply that by the 60 such incidents the average procurement organization sees each year and you've got yourself a pretty hefty price tag if you don’t pay attention to supply risk management!


3. What is supply risk management?


Risk—the probability of an unwanted event or outcome.
Chartered Institute of Purchasing and Supply


Risk—the possibility that an event will occur and adversely affect the achievement of objectives.

Enterprise Risk Management Framework


Risk—is a measure of future uncertainties in achieving program performance goals and objectives within defined cost, schedule and performance constraints.


Risk Management Guide for DOD Acquisition


The CATTAN definition and my definition of “Supply Risk” is defined as the probability of an incident associated with inbound supply from individual supplier failures or the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety due to change, uncertainty, variability and chaos particularly during turbulent times.


P&G (Proctor & Gamble says that it operates in a VUCA "volatile, uncertain, complex, and ambiguous" world.


4. Where do you see the biggest areas of risk?


Based on CATTAN’s research, I see the most common supply chain risks to be in the next 1-5 years:


  • Financial instability, bankruptcy, or financial failure of a supplier
  • Natural disasters or “acts of God” affecting suppliers’ operations
  • Political instability, terrorism, civil strife, or war affecting suppliers’ operations
  • Labor availability, slowdowns, strikes, and quality of workforce
  • Health issues, disease, quarantines, and pandemics
  • Inadequate production capacity and poor logistics and transportation infrastructure
  • Transportation disruptions or terrorism infiltration with inbound supply channels
  • Theft, piracy, pilferage, and hijacking
  • Material price fluctuation swings
  • Volatile fuel prices, extra surcharges, and energy shortages
  • Power and electric grid disruptions, failures, brownouts, and blackouts



5. How do companies get started with supply risk management?


For procurement, risk management represents the process of measuring or assessing risk and then developing the right strategies using our 4-step process:


1. Risk Identification


  • The intent of risk identification is to answer the question, “What can go wrong?”
  • Identify associated root causes, begin their documentation, and set the stage for their successful management.
  • The level of likelihood of each root cause is established utilizing specified criteria.


2. Risk Assessment

  • A documented risk assessment process should be undertaken to evaluate your key suppliers on a regular basis.
  • This assessment should be an on-site supplier facility visit that assesses the following characteristics
  • Each characteristic should be assessed as low risk, medium risk, or high risk.


3. Risk Analysis


Risk has two critical elements:


1. Likelihood of occurrence (probability)
2. Severity of impact or consequence (magnitude)


The level and type of consequences of each risk are established utilizing criteria. Risk assessment for all the suppliers uses a red, yellow, green chart---a Balanced Scorecard approach. Risks in the red receive a higher level of management attention than risks in the yellow or green zones.


4. Risk Mitigation


Having assessed all the risks and identified those that require action, plans need to be drawn up and responsibilities assigned to control and mitigate these risks.


Risks should be allocated to an owner, who is responsible for managing them, possibly with the help of other supply chain team members. The allocation of risk should be dependent on the assessment of the likelihood and consequence of the risk and then the identification of who is best able to control or manage the risk.


The intent of risk mitigation planning is to answer the question, “What is our approach for addressing this potential unfavorable consequence?”


· Avoiding risk by eliminating the root cause and/or consequence

· Controlling the cause or consequence

· Transferring the risk, and/or

· Assuming the level of risk and continuing on the Supply Chain Continuity Plan


Risk mitigation is the activity that identifies, evaluates, and selects options to set risk at acceptable levels given supply chain constraints and objectives.


It includes the specifics of:


  • What should be done?
  • When it should be accomplished?
  • Who is responsible?
  • What will it cost to implement the risk mitigation plan?



About Thomas Tanel




Mr. Tanel has an international reputation as a Subject Matter Expert, Consultant, and Seminar Leader in Purchasing and Supply Management, Logistics and Supply Chain Management, Distribution and Demand Chain Management, Business Process Outsourcing, and Collaborative Negotiations. With more than 35 years of experience, he offers a seasoned and practical perspective on supply risk management through his line, teaching, staff, and consulting positions. He will share with you ways to identify and explore the longer-term implications and possible supply risk management responses to current challenges from a pragmatic perspective by offering you useful tips based on the latest studies and research as well as a four step supply risk management process as a take-away.  Tom can be reached at or 979-260-7200.


LinkedIn Profile

My recent interview with Paula Rosenblum titled Should US Retailers Do More Sourcing Near Home has received a number of comments on LinkedIn Groups. Paula believes that maintaining a sourcing base in one's own country is a sound business practice. She thinks we need to be somewhat self-sustaining and have the capability to build cars and trucks, make clothes, and grow enough food so that we can have enough to eat.  We have become a debtor nation, and therefore do not control our own destiny anymore.


However, the counter argument to this is that companies only look at the bottom line results when deciding on near-shoring versus off-shoring. This was the comment provided by Zvika Givili. Zvika Givli is a general manager of a plant in China that sources from all over the world, including China. They are a co-packing company for confectionary products. The confectionary industry is very seasonal. There is a big peak between June and September where they process 80-85% of their turnover. During the peak season their burden increases by a factor of 10, compared to the slow season. It is a very intense manufacturing environment during the peak season.  The supply chain is key in this process because they need to make sure all material arrives at the same time. Since it is a seasonal business, there is little flexibility. The final products are also complicated, with 20 to 30 components. Bringing in products on time is the main challenge.



Near-shoring Versus Off-shoring


Zvika believes companies will make the choice of near-shoring versus off-shoring based on profit potential. In the confectionary industry the products are not standard. Production is heavily dependent on manual labor. To hire the labor required in a Western country would lead to an increase of approximately 10 times higher product costs. In some industries near-shoring may be beneficial. There would be a particular benefit where the quality and risk plays a large role. Examples would include pharmaceuticals and health care. Near-shoring is good for customers with high requirements regarding quality and short lead-times. For example, milk products have a very short shelf-life. In this case you cannot deal with off-shore suppliers.


In Zvika’s business some components are sourced from China. However, the food itself is sourced from outside of China. They source food products from Europe, US, Australia etc. Since they are a food factory, the customers demand higher quality. There is a lot of risk when dealing with food products. This is why the food is produced outside of China. They do the final packaging in China.




The choice of near-shoring versus off-shoring is based on profit potential. Companies will do what is best for their bottom line. Companies will look for high profits at a reasonable risk.  It is important to consider the type and volume of product when assessing whether to source near-shore or off-shore. If the product is small enough it will spread the total landed cost items such as Customs and shipping. Zvika uses the rule of thumb of a mark-up of 2.5 to 3 on the FOB price for products shipping from China to US retailers.



Zvika Givli  on LinkedIn


The decision to do near-shoring or off-shoring is determined by the total landed cost results.



Warlito Vicente has noticed an increase in requests for total landed cost analysis.


Due to globalization, companies realize that it is not always about getting the cheapest widget from Timbuktu. You might have the cheapest widget from Timbuktu for 10 cents, but it will cost you an arm and a leg to get it from Timbuktu to New York. This wouldn’t make much sense.


What might make more sense is to get the widget from Mexico, or even closer, such as a rural area in the US.  You could re-configure your value chain model and come up with a better total landed cost. Your total landed cost may come out to be lower when doing near-shoring, even if the basic commodity is cheaper overseas.



Factors to consider when calculating total landed cost


You need to look at total landed cost from end to end. This means looking at the costs from the point of origin where the commodities are produced, including the cost of production, transportation from source to the factory, factory to port, port to port, entry port to warehouses, and warehouses to final distribution outlets. As you move the product from production to distribution to sales, all of these will have their own costs.


Normally, consumers just look at the production costs. They think the products from China are so cheap because you can buy them at a low price on the retail shelf. However, production is just one aspect of cost. You need to consider the transportation costs, storage costs, distribution costs and other supporting costs of administration, IT and other support services that result in the total cost.


Most companies look at things using the old way of seeing the product and labor cost as the only indicator for doing business. This is not enough today. In addition to looking at the production and labor costs, we also need to look at the transportation costs for each segment of the supply chain. Most consumers just see the product as something already on the shelf. However, before the product got on the shelf, there were processes that took place that brought it to the shelf. If you don’t consider these, they become hidden costs that will come back to bite you.


This is one of the reasons that successful companies such as Walmart, Nike and others are always watching their bottom line daily. They continue to study their supply chains and looking for ways to generate efficiencies. They look at the impacts on transportation, warehousing, Customs costs, etc. They run the numbers on all stages of the process (production, packaging, shipping and selling). If the company doesn’t keep track of these costs there will be no basis for finding out how they can improve their performance. They may be making decisions based on flawed information.


Are there new cost factors that should be considered?


Total landed cost model has matured. It is a matter of expanding knowledge on how to use it. Some would thing that total landed cost is only from port to port. However, there are still upstream processes to consider. From what has been seen at this point, Warlito believes the total landed cost model relatively mature. It boils down to getting more companies to become more aware of the necessity of knowing the total landed cost.


Are there non-cost factors to consider when looking at near-shoring versus off-shoring?


Non-cost factors are also an important consideration.  Timing, or service level factors also need to be considered. You may also need to consider the type of product. If the product expires rather quickly, you may need to choose a closer location. For example, it may make more sense to get fresh grapes from Chile rather than China. Yet, for some commodities which don’t need this type of service level, it may make sense to get t-shirts from China rather than Peru because the total landed costs and service levels still justify that decision.


If you product expires relatively quickly, then you go to a nearer source. Another example is using local strengths to compete. Rather than competing against the Brazilians directly, the Canadians used local varieties of grapes which could not be grown as cheaply in Brazil. In this case it is about finding a niche market.


About Warlito Vicente




Warlito Vicente works with a logistics a company that is currently ranked around 450 in the global Fortune 500. He is based in the North American office. Warlito has been with the company for three years. He initially started as a temp, doing data mining. Since this he has embraced the supply chain industry.


LinkedIn Profile

How Value Networks Can Prevent Disconnects


I interviewed Verna Allee, CEO of Value Networks, LLC. Verna discusses how Value network analysis is a human centric, role-based network view of any business activity, so instead of evaluating work as a process or quantifiable production line, the roles, interactions and deliverables that the end product rests upon are highlighted. Allee says that behind all processes are hidden networks of human interactions that are critical to getting the work done. These networks are predicated on patterns and activities that can be analyzed to determine gaps and disconnects and avert future problems.





When we look at the hidden network, we are actually able to predict up to ninety percent sooner when that work package is going to go wrong or when that particular case is going to run into problems.-- Verna Allee

The Two World Problem



Verna Allee’s company, Value Networks LLC, was founded in 2007 based on her ValueNet Works methodology, a strategy that intersects business process and human networks. They serve a wide range of organizations from Fortune 1000 companies to non-profits.  According to Allee, the complexity of networks has increased dramatically in the past decade.  This is evident in the supply chain and logistics industry as it transitions to global resourcing.  She says that people in the industry are becoming aware that the supply chain is not just about business transactions; it’s also about how relationships are built and how people interact around key decision points and action points in the supply chain.



Allee explains what she calls ‘the two world problem.’ Historically the worlds of human interactions and business interactions were envisaged as separate, “yet most experts will say that the intangibles that reside in people and networks are actually 50-70% of the business value.”  Because the spotlight has been primarily on business interactions, development of technologies and tools has advanced in that direction, while human interactions have remained in the realm of the organization chart.  The result has been a big disconnect between human interactions and business processes.  Now, however, with visionaries like Allee, collaborative platforms and applications are being developed that help make communication efforts within a holistic network seamless.



Value Network Analysis is Human Centric



Allee examines the potential effects of the ‘two worlds disconnect’.  She explains that Boeing, for example, is a company that has used value network modeling extensively in the areas of supply chain and logistics as well as flight test and validation.  Their intent is has been to manage the systemic risks involved in the complexity of these networks and have discovered that process monitoring tools are inadequate to meet the challenge.  In addition, they require a better model for resourcing or appropriately applying the skills of their staff.  These concerns are endemic to many organizations today and have created the environment where value network analysis can be of monumental value.



Allee defines value network analysis as “any set of roles in interactions that generates a specific kind of business, economic or social good.”  Value network analysis is a human centric, role-based network view of any business activity, so instead of evaluating work as a process or quantifiable production line, the roles, interactions and deliverables that the end product rests upon are highlighted. Questions like “How can the work be done most effectively?” aren’t assumed to rely solely on the functioning of the technology but rather the collaborative efforts of the individuals making up the network.


Allee describes how her company has brought this human centric modeling approach into many different areas and industries, the supply chain being one of the most problematic since there are so many key roles. There are shippers, brokers, carriers, forwarders, suppliers, management, etc., and the interactions between them are not simple business transactions.  The interactions are quite complex, made up of many conversations and informal connections, each which contains subnetworks with their own centers, nodes and perimeters.



Revealing Hidden Value Networks



The predictive nature of value analysis is a powerful concept when applied to networks.  If you look at the network of traffic planning, says Allee, by analyzing traffic flows and patterns, they’ve been able to predict up to two minutes before hand when accidents are most likely to happen. With regards to the supply chain and logistics network, the question is what would those predictive patterns actually be? Will they reside in the formal process or in something less explicit?


Processes are often translucent in the supply chain, but behind the processes is a hidden network of human interactions that is of critical importance. Allee says that what she and her colleagues have discovered is that the network pattern is a real predictor of when the process might break down. If there is a disconnect in the human network, there will subsequently be a problem in more formal business transactions because each transaction consists of a complex array of human interactions.


Allee explains how her company models value networks. She provides the real world example of a single procurement case for a complex government contract with a heavy manufacturer that involved ‘the activities’ of pricing and creating statements of work. Each of the nodes of the value network is defined by a specific role that was actualized during these particular activities.  Both formal and informal transactions, such as deliverables or communication, are depicted by arrows between nodes. The goal is to be as specific as possible and to identify all the elements or transactions.  If this is possible then the network can be effectively managed problems can be predicted and averted.


“When we look at the ‘hidden network,’” says Allee, “we are actually able to predict up to 90% sooner when the work package is to go wrong and when that particular case is going to run into problems.”  According to the model, there will be a sign at an earlier stage that a problem will occur at a later stage if changes are not made. In addition, each of the activities is given a time/ cost value, which, of course, will increase if problems are allowed to occur, whether they are in the form of employees being inefficient or customers being unhappy. When problems are caught at an earlier stage, when the model predicts it, then organizations have the time and flexibility they need to negotiation new activities.


The value network model serves dual purposes: it provides structure as well as flexibility, and the effect is that expenses are reduced, employees are better prepared and more efficient and customers are happier.  Verna Allee says that value network modeling is an evolving field and her company is excited to join with others to bring this way of thinking forward.





Predictive Analytics

Identify work packages, cases or processes at risk



Value Networks for Business Process Improvement

A detailed example of an internal value network for technical repair



About Verna Allee


VernaAlleePicturesmall.jpgVerna Allee is a distinguished speaker, author and thought leader. She is  recognized world-wide for her work in value networks, knowledge management, intangibles and new business models. Verna is currently CEO and co-founder of Value Networks, LLC, a technology company providing enterprise level value network visualization and analysis applications. She has a background in reengineering of complex business processes and has also been active in knowledge management and sharing, intellectual capital and new business models.  Verna is a visionary pioneer in the field of value network analysis.

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Over the last 5 years supply chains have become increasingly global. However, John Charnovich has seen the cost of logistics decline -- something he believes is due to several factors including a recent decrease in oil prices, improvements in global logistics and supply chain technology and foreign countries recognizing the need to recruit multi-national companies and investment. Although there has been a backlash by the US and a reduction in the amount of off-shoring, both from a services and manufacturing standpoint...


"I think that it’s both an interesting and probably temporary effect. I don’t know if this is the start of some rebalancing and a new trend. I suspect not, because the variables and the economics around cost are still going to be predominant drivers."



"When you have a whipsaw in the economy, and then ultimately, a whipsaw in the supply chain, you tend to have a major imbalance between your supply and demand," said Charnovich, "and it takes a lot of supply chains a period of time to get that back in balance. Supply chains tend to run really well when things are steady state, but when things change rapidly, a lot of supply chains struggle to deal with that," John added.


Along those same lines, Charnovich commented that, "Companies tend not to want to innovate when things are running smoothly, and this recession has caused significant pain for a lot of companies, so, they’re looking at the things that didn’t go very well, and they’re trying to figure out what they need to change. So, I think coming out of this slow-down, we’re going to see a lot more innovation, a lot more improvements and enhancements to supply chains in general.”


Responsiveness Will Trump Efficiency


Regarding the positive impact of the recession, John Charnovich said, "In the future, responsiveness is going to trump efficiency." In the past, he said, profits have come from very efficient and stable supply chains. What we'll see next, he believes, are supply chains that can handle disruptions by being more flexible.


The key to responsiveness, according to Charnovich, is that customers are no longer just your customers -- today, customers are also your partners and competitors. "Your ability to be flexible and to work with your network in the supply chain is going to drive more profits than an inflexible, inefficient supply chain. And so, collaboration and responsiveness are going to be key drivers moving forward,” said Charnovich.


Going Back to Basics


From a supply chain perspective, and in our everyday lives, Charnovich says we're going back to basics.


"People," he says, "are less interested in having mega- options." If you have several basic products or services that satisfy a need, John Charnovich believes that's going to be more than acceptable moving forward.


'This back to basics trend may make chains less complex," said Charnovich. "If we can reduce the number of SKUs and the number of brands and the number of things around a certain product category, that should allow our supply chains to be less complex," he added. How prevalent that trend will be remains to be seen, but Charnovich says he is seeing it already.


By way of example, Charnovich said, "I have significant experience around the consumer goods supply chain, and along the supply chain, a complementary area is the trade promotions management space. And I will tell you that a lot of consumer goods companies right now are really looking to invest and to improve their trade promotions spend, and, in fact, in consumer goods companies, trade promotion spend tend to be one of the top three highest spend categories in those companies."


What these companies are doing, Charnovich explains, is taking a serious look at where they're spending their money and where the profitability is, and when they recognize brands that aren't profitable, or brands that serve only a small portion of their customer base, they're reducing the number of SKUs, the number of brands and re-deploying trade sending elsewhere. Carrying more inventory than you need is adding unnecessary complexity and cost to the supply chain, and when you consider the fact that some of the inventory perhaps doesn’t make its way through the entire supply chain to the end customer, you realize there are places to trim.


About John Charnovich


John Charnovich v3 smaller.jpgJohn Charnovich is a seasoned Global Business Executive with a successful track record of accomplishments in General Management, C-Level Leadership positions and has built a reputation of being a diversified Technology veteran.  He has a broad exposure across the Enterprise Software, Consulting, E-Commerce, Consumer & Industrial Goods, Telecom and High-Technology verticals.


Experienced as a Fortune 100 CIO, IT and Supply Chain Executive at distributors and manufacturers, John has been a transformational strategist and Best Practices initiator. He is an experienced leader guiding companies for high growth, mergers, acquisitions and turnarounds by building highly capable and responsive organizations.  Equally proficient for start-up and the rapidly growing SMB market, John is a strong Profit & Loss and Operating Executive. From establishing and managing a European Software Business to leading all Operations, Technology, Professional Services and Post Sales in leadership roles and most recently as Chief Customer Officer, John has delivered award winning, innovative “SaaS” and on-premise solutions to the Fortune 1000 and integral to 5 successful company exits including an IPO.


John Charnovich on LinkedIn


Paul Van den Brande, Partner at Just in Time Management Group in Belgium discusses collaborative logistics: who, what, why and how...



Paul has been in freight forwarding for a long time and he has always had the newest business models and technology in mind. In previous discussions Paul talked about outsourcing logistics to 4PLs. He sees that the future of outsourcing and 4PL logistics includes the side effect of collaborative logistics and carbon footprint reduction.



What is collaborative logistics?



Today, collaboration means that competition works together through a neutral third party so that the data and confidential information is segregated. There is no direct access to confidential information between players in that field. This is a broad perspective because you can have broad collaboration between different suppliers delivery their products into one buyer, or buyers who have different suppliers and bring them in one truck/aircraft/ship. They would have to delivery at certain times. Collaborative logistics means competitors working together to service a common customer, or as a customer bundling competing suppliers (ie trucking companies) into one truckload to maximize utilization, have return loads, etc.



Why do collaborative logistics now?



The cost effectiveness is the major driver. In classical outsourcing to a non asset based carrier neutral company/4Pl, the savings will be 10% on average. If you do collaborative outsourcing the savings can go up to 20%. You can also realize a 5-10% improvement in service levels to the retailer. It is cost effective to pursue collaborative logistics. Also, the data is organized better and the soft savings are tremendous, without having to lay-off people or to necessarily shifting the trucking companies or logistics providers you are working with. The trucking companies or logistics providers are just a layer on top. What you need is strong software due to the increasing complexity of operations as more parties enter.



Who is currently doing collaborative logistics?



A year ago there were some emerging projects which have now come into play. In France, collaboration has been put together with Glaxo Smith Kline, Henkel Cosmetics and Colgate. Henkel in France collaborates with three other FMCG companies. This is made possible by their logistics provider. The usual logistics challenges of availability, increasing congestion on roads and fuel price volatility were becoming even more strained in this environment. Henkel recognized that they needed to make a significant change in their supply chain. Their solution was industry ‘pooling’, which involved Colgate, GlaxoSmithKline (GSK) and Sara Lee. This collaboration with three other FMCG companies and a logistics provider required a cultural shift within the company, as well as commitment from all parties.



These leading companies have been sharing their experiences of collaboration across the supply chain. At a recent supply chain conference which focused on horizontal collaboration, strategies discussed included:



  1. Sharing knowledge, experience and expertise
  2. Consolidating goods flows
  3. Sharing transport vehicles and network capacity
  4. Sharing logistics infrastructure
  5. Sustainability objective drive collaboration


They are delivering into the big department stores similar to Walmart. All of the suppliers to this large retailer used the same logistics company. They decided to consolidate everything to get full truck loads and to organize empty pallets. They optimized full truckloads arriving at dedicated times with fast turnarounds. This started mid 2010. The cost savings are tremendous. Paul thinks they can do even better by using fourth party logistics, rather than third party logistics.


As these platforms continue to be built and put into operations, other stores can collaborate to grow the platform and the benefits and profits are shared with all of the players.


Other companies using collaborative logistics include food manufacturers such as Heinz, Henkel, Proctor & Gamble, Nestle Waters, Colgate Palmolive and Kimberly-Clark.



How to get started with collaborative logistics?



Paul believes you first need data. You can either start from retail companies or from suppliers. It is either a pull or a push situation. Today, Paul is speaking with some retailers who are dealing with the big manufacturers of computer hardware. The retailers need to meet a minimum sales volume, otherwise their contracts are stopped. This is dramatic for the distributor because they have service level agreements in place and customers to service. The distributors proposed to the big hardware producers that collaboration may need to be considered due to quantities not being met. The proposal is to create a collaborative logistics platform whereby everyone wins. This platform is currently being created.



About Paul Van den Brande:






Paul Van den Brande is the CEO of Noble House nv, leading a team of experts in the areas of physical distribution, logistics, supply chain management, customer service, and e-business applications, whose collective role is to assess existing operations, identify opportunities for improvement, recommend solutions, and work with clients to implement recommendations.




Paul is planning to write a book on collaborative logistics later this year.

I interviewed Paul Van den Brande, CEO Noble House nv where he discussed learning to speak the language of the C-Levels and get the green light on using 4PLs:









Breaking Down Barriers to Bringing a 4PL On Board




Paul Van den Brande advises anyone who is looking for the green light on working with a 4PL to "keep it simple and speak the language of the CXO, CEO, CFO or any other C-level you are pitching."




As the CEO of Noble House, Paul Van den Brande refers to the fourth-party logistics concept as a "managed innovative logistics collaboration," or MILC.




4PLs, Paul says, were initially launched by the "big four" logistics consultants, and try as they might, they were unable to successfully market the idea, primarily because they failed to understand and address the concerns of logistic teams inside organizations. As you might imagine, those concerns were, and still are, tied to job loss and loss of knowledge.




To address those issues and determine other barriers that keep organizations from pursuing outsourcing, Paul conducted a survey on LinkedIn. Proof of cost savings came in first, followed by convincing C-levels. With a bit more digging, Paul found that most logistics professionals were not considering their audience before making the pitch. For example, telling a CXO, CEO, CFO or CPO that you are trying to save 20% per square foot on 10 pallets per load liter has very little meaning to people in those position -- it is also why very few logistics and supply chain professionals are actively involved at the board level.




The 4PL Pitch



When pitching a CXO or CEO, Paul suggests asking what he or she believes the cost of logistics means to the business? The answer is almost always "maybe 1% over turnover." It might surprise your CXO to learn that, on average, globally, it is 9.14%, and that a 4PL can save 15% on logistics expenses. To put it in a language that the CXO will understand, the overall savings is 1.371% over the turnover -- a figure he or she will immediately relate to because, at the end of the day, it will boost his or her EBITA.




The complete checklist of how to pitch each C-level in a language they will understand can be found in his Paul Van den Brande's book, but he did provide additional insights into securing buy-in at the C-level, including how to address common objections.




For example, some organizations with union affiliations will oppose outsourcing on the basis of possible job cuts. A serious 4PL, Paul says, will not necessarily have that effect, because most will utilize existing staff during the partnership, and will also provide all training.



Another common objection made by the traffic or supply chain manager is loss of control and loss relationships with existing carriers. Again, Paul says:


a true 4PL will absolutely leave the carriers in place, and will likely offer them additional business, not just in terms of volume and freight, but also in terms of return loads. They will also benefit from software tools, which most can't afford to invest in on their own.



What to Expect From a 4PL



The process begins by taking a snapshot of what has been paid for services to date. That, Paul Van den Brande says, is purely open book, and any direct expenses, including the customer's software tools, should be deducted first. The remainder of the cost becomes a gain share.




A true 4PL will arrange its exit at the start of the relationship. You might start with transportation, and then possibly find joint projects in inventory carrying, which is important within the total cost of ownership of any supply chain. It is vitally important, Paul says, to negotiate the exact nature of the relationship, including expectations and anticipated results, with a C-level.




Some companies have tried "collaborative clustering," where, for example, two pharmaceutical companies attempt to work together with their 3PLs in place. According to Paul, that model failed because 3PLs need to fill their own trucks, vessels, airplanes and warehouses, so the necessary gain sharing distribution system is not in place, which results in a breach of trust.




Finally, Paul Van den Brande also says he advises companies not to board with any 4PL that claims to be equipped to handle everything, because it just doesn't work. Optimizing and upgrading is a step-by-step process that involves best-of-breed software and continuous improvement programs.




Why the Time For a 4PL is Right



The first advantage of working with a 4PL is the cost saving element -- that 1.371% of the turnover, which Paul Van den Brande referred to earlier in the interview, is purely and simply removed from logistics costs.




Collaborative logistics, Paul says, is a positive side effect of outsourced 4PLs and another important advantage in terms of managing return loads and reducing a company's carbon footprint by putting less trucks on the road.




Third, while restructuring is a fact of the new economy, and something that isn't likely to go away, a good 4PL will find ways to keep, train and reintegrate an existing workforce.




Finally, as Paul Van den Brande details in his book, "There will come a day when  the cost of the expertise of the logistics provider will become so expensive and the people will become so rarely available that only the largest companies will be able to hire and pay for expertise in-house, so it will absolutely go out of the company, and there will be stronger clusters, where all this expertise will become available at the outsource base. Like software as a service, like business process outsourcing, these things will undoubtedly be part of the new economy emerging.”




Noble House' 8-Step Roadmap to Boosting Your EBITA



To recap the benefits of working with a 4PL, Paul Van den Brande offered this list from his company's website:




1.    In practice we save 1.371% over turnover in your logistics costs. (Outsourcing 4PL).




2.    All our costs are paid out the logistics savings so our intervention is not costing hard cash. (Seamless).




3.    The most powerful software is deployed and your employees are trained hereon. (Best-of-breed).




4.    Then we hire your staff, during our partnership, so you should not dismiss them and internal knowledge for your business unit is protected and available, a 'crisis-buster' to the restarting of the economy (Lease-back).




5.    The incumbent suppliers will remain in service and we possibly offer them more business. (Upgrade).




6.    Our exit can be arranged, if desired, at the beginning of cooperation. (Contracting Results).




7.    For any company we suspect a logistic saving of 1.371% over turnover as found on their latest Balance Sheet - calculation of which parameters can be reviewed on




8.    Scale economies by region and / or business cooperation logistics (logistic sector collaborative clustering) increase savings exponentially, we manage to provide the necessary gain sharing distribution system, to avoid early trust breach.








About Paul Van den Brande:




Paul Van den Brande is the CEO of Noble House nv, leading a team of experts in the areas of physical distribution, logistics, supply chain management, customer service, and e-business applications, whose collective role is to assess existing operations, identify opportunities for improvement, recommend solutions, and work with clients to implement recommendations.




Paul Van den Brande calls himself "The 4PL Coach." He has also quite literally written the book on 4PLs, titled, 4PL -- The book that never should have been written, which provides common sense guidelines for dealing with "generalized logistic changes."

There is a new normal out there now. If you are not working in true vested relations with your suppliers and carriers, you will be in some rude awakenings. With this world economy you would think we have learned how to work with each other domestically first, but Hank doesn’t think we have.The bottom line is we need to learn how to work together more efficiently.-- Hank Mullen


I recently interviewed Hank Mullen,VP Transportation Solutions at Transolve, Inc. Hank did a whitepaper with Kate Vitasik from  Under the resources section you will see the white paper by Transolve titled ‘Unpacking Transportation Pricing – A White Paper Challenging Transportation Pricing Models. In this paper which is over 40 pages you can learn how to realize 3 to 7 percent savings if you just pay attention to the detail. Your savings happen in the detail and you need to be a detailed person.


Kate also has a series of papers on packing and pricing methodologies. The first was called ‘Unpacking Oliver – 10 Lessons to Improve Collaborative Outsourcing. Hank has been in transportation for 42 years and did not know who Oliver Williamson was. He won the 2009 Nobel Prize for economics in the supply chain. Oliver’s paper said there is a cost doing everything. There is nothing you do in supply chain that has a zero cost or impact.


The second paper on Unpacking Transportation Pricing is a 40 page document that Transolve wrote with 3 other authors. A few additional papers will be published soon on packing truckload pricing and packaging pricing which is mainly methodologies and basic premises of vested outsourcing and why you really need to know your suppliers to take out cost and inefficiencies and put them into systems almost on a daily basis. This, according to Hank, is our new normal.


What is Vested Outsourcing?


Vested Outsourcing is much more than mere partnerships or collaboration. It goes so much deeper than that now. The key thing with collaborations and partnerships is to get the trust and ensure the people you are working with are telling you the right things. That is the most difficult thing, to get down to the bare bones – to know the effects your actions have on others in the relationship. A classic example would be a freight sales person trying to get all of a customer’s business, knowing that a portion of it just isn’t profitable for that carrier. They take all the business because they just want it all, without realizing that some of it won’t benefit everyone concerned. The just want market share.


This relates to a recent discussion regarding near-sourcing and outsourcing by Paula Rosenblum. If you look at the total cost of transactions, some believe that you should choose whatever is closest and lowest cost. However, you can’t think this way anymore. While the source may come from China at a cost of $1/unit, you need to look at the total carbon cost of that shipment. Even though the landed cost may be less the resources you used will affect future life on the planet and will drive up costs. Using that much of a carbon footprint will drive up costs elsewhere in the supply chain.

When Hank goes to some of the supermarkets he notices stickers comparing store brand versus a product from China or Vietnam for example. One may be 10.9 cents per ounce, while the product sourced from China may be 6.7 cents per ounce. Yet, this doesn’t tell you the total carbon footprint and how much resources were used to put that product on the shelf. We need to start thinking in this way.


People sometimes ask why we want Mexican drivers in this country. They may say “Buy American”. This type of example is something where you need to look at total cost. The paper titled Unpacking Oliver really makes you take a look at these things.


Examples of Companies Doing Vested Outsourcing


Microsoft, the US AirForce and more. Go to Vested Outsourcing is really catching on, which is basically self preservation. Companies need to simply take cost out of the supply chain but also to be able to react. The customer service aspect is huge, especially with the taking orders on the Internet. Manufacturers need to position their inventory and serve unique customer needs in a market that changes daily.


I like your new shoes


Hank has two white papers. One is titled “I like your new shoes” which is by the National Motor Freight Traffic Association (NMFTA). The published a book called the National Motor Freight Classification. Essentially, there are 18 classes to all the commodities to move. The harder it is to move a commodity the more expensive your freight class. The lowest class is 50 and the highest is 500. The LTL carriers use this to determine what to charge at cost per hundred. The National Motor Freight Classification took the shoe classification from a class 70 and increased it to about 150, essentially doubling the price per unit to handle shipments of shoes.


Less than 2 or 3 weeks ago Nike announced they anticipated an increase in transportation cost, which would hurt their profitability. This paper breaks down the problem we have with domestic and international. We are the only country in the world that uses National Motor Freight Classification. It becomes problematic to get your landed cost from or to the US.


Hank thinks the whole system is detrimental. The paper brings up an example with his 4 year old granddaughter where he bought her a new pair of shoes. The point of the story was that when you move commodities you need to start thinking about the amount of space that we use to move the commodities, not like the National Motor Freight Classification which gives you a cost per hundred pounds and which goes in a vehicle which can handle up to 48,000 pounds, but rarely exceeds 30-32,000 pounds. Products have gotten lighter over the years. You just don’t cube the capacity of the trailers out. Hank would much rather see the carriers charge by the amount of space used, versus the weight. This gets very technical really quick.


Required Mindset


Hank believes we need to get some early adopters to start doing these things. The classic example for making shipments smaller was Walmart. In 2008 they told their suppliers to make their products 5% smaller. Before everyone complained they realized it was not that bad. If you think about a bottle of asprin and take the cotton out you will realize it is easy to take out the 5%. When Walmart did this they realized savings of 3.2 billion dollars. It is time to get the Vested Transportation concept out there. We should start talking with all of our suppliers and ERP systems. We should use what have more efficiently, rather than making things bigger and more complex.


See Transportation Pricing Reform and the NMFC


About Hank Mullen


HankMullenPicture1.jpgThis is Hank’s 42nd year in the industry. He believes networking is very important. Hank gets exposed a lot of very gifted people. Looking at the University of Tennessee Executive Education Forum -- who were the sponsors of the paper mentioned earlier, Hank was very impressed with information from the professors and the 200 plus people who attended the forum. He believes the forum was much better than a lot of the networking groups where you just meet carriers and shippers talking about the same old things. After 42 years in the industry Hank finally realized where all the smart people are.


Hank believes there is more than one solution out there in transportation. He hopes that our country puts this together. The future he sees for transportation on present is going to be difficult. The better we can collaborate and do Vested Transportation, the better for everyone.

3PL customer care is an area that Jasper Gilder is very interested in. There has been quite a lot of things coming out recently in the UK related to employee engagement, particularly the MacLeod Report which came out early last year. Jasper did some work in the 1990’s in another report called Achieving Success Through Partnerships with People, which is also related to the employee engagement theme.



Jasper is currently working on a 3PL project on customer care for drivers. This links into the issue of employee engagement and how customer care and employee engagement fit together.


In terms of employee engagement, the key is that as organizations get larger the ability to connect with guys on the shop floor who are doing the work on a day to day basis, starts to get diluted. Sometimes it gets diluted through systems and through organizations. It also gets diluted because middle managers start to get appointed. They don’t necessarily have the same agendas as the people who are running the business when it is small.

As a result, employees become dis-engaged. They see their work as a ‘job’ to go to every day and as a means of earning a living. They don’t necessarily have the enthusiasm or interest in the business itself. This results in interesting effects in terms of the way in which they do their job, their commitments and motivation. It also has an effect on the level of customer service they provide. This means that customer service sometimes starts to suffer.


If it is a 3PL organization, they will provide customer service under the name of another organization, which means they are probably not doing a great job.


One of the things we can learn is that organizations that really work hard at getting employee engagement set up will benefit in a number of ways. For example, Jasper did some training in 2009 where he worked with first-line managers in a distribution organization employing 250 to 300 people. It was generally considering to be a quite well run 3PL operation.


However, the first-line managers were not necessarily always completely engaged with different issues. One of the things they hadn’t been engaged with at all was the financial operations of the business. They saw their role as getting their jobs done, getting the vehicles out every day, etc.

When they started getting the employees involved and engaged in seeing that they had a role in supporting the business, rather than a purely operation role, they suddenly found they could make enormous savings. In terms of a return on investment in training it was quite an interesting issue. The company invested less than 10,000 British Pounds in the training. However, the savings they found were over 125,000 Pounds. It was an enormous return.


Japser jokingly points out that the result was not due to the brightness and intelligence of the trainer, while it did have something to do with it. It was largely due to with the guys realizing they are throwing money down the toilet and wasting cash. All of a sudden they became engaged in running their business, rather than just seeing themselves as being a small cog in something they couldn’t change in any way.


Regional Variances Between UK and US


While Jasper’s insights into the US are not that great, he does have something to say about customer service. Obviously, engaged employees will provide a greater degree and interest in customer service and customer care.  For example, Jasper is currently working on a 3PL contract. The drivers out there delivering are representatives not only as 3PL suppliers they work with, but also representatives of the client. There is a two-way client system where they work for a logistics contractor, but are generally considered to be representatives of the organization they have contracted into. This obviously has some interesting issues because the way they provide customer service is heavily linked into the way in which they are managed and led.


The interesting thing is that it is generally believed in the UK that the customer service revolution that started off with Tom Peters and the Search for Excellence came East over the Atlantic. The customer service revolution generally started in the US and then moved to the UK. However, in the last 5 to 6 years we have all taken our eye off the ball in terms of customer service. The US was considered to be the cradle where you would find customer service not to be found anywhere else in the world. From Jasper’s experience during his recent trips to the US, the customer service experienced in a range of different areas had started to declined, compared with the past.


The UK has also started to experience this decline. This is not good because effectively, in the logistics industry, the 3PL providers are sending people to be representatives of the business where they get their money from. It is important to get this right. It is absolutely vital that the staff has a high level of employee engagement.


One of the things Jasper has been seeing is that working with drivers out delivering, there is a significant difference in the degree of interest and commitment to customers. There is a very strong relationship there between this and the level of employee engagement. This can be demonstrated when you talk to the drivers.


A few additional things worth considering include the point that employee engagement becomes more difficult to achieve the larger the organization is, due to the layers of management involved. Two additional things worth considering are what happens and gets in the way of making it happen effectively. Middle managers are absolutely vital to the employee engagement in any organization. One of the things which sometimes causes them to be ineffective in employee engagement is that the communication within the organization isn’t that good. This has a real impact and middle managers play a big role in this. A lot of the time the messages get lost and confused.


Recently, Jasper has had some dealings with a very large organization which is not in logistics. The customer service was pretty dire. As a result, rumors spread throughout the organization which were promulgated by the middle managers and which were entirely un-true. Staff can be misled by middle managers whose communication can be poor.



Middle management sometimes forms an impermeable layer which prevents people from really feeling committed and enthused to the organization because the organization is represented by the middle manager who may not particularly be engaged themselves.



The other issue is that HR departments have a major role to play in creating the circumstances and the situations where employee engagement can really work. Their role is to provide help and support to managers in terms of how management can be done effectively and staff can be properly managed and led, etc.


In some organizations the HR departments are incredibly influential and you can see the results. In other organizations it is all too common that line managers regard HR managers as people who seriously organized form filling and filing, but don’t really have much of a role to play in the leadership of the business. Jasper thinks this is quite short sighted.


About Jasper Gilder



Managing Director at Jasper Gilder Limited


Hemel Hempstead, United Kingdom

Management Consulting


Jasper on LinkedIn

Jasper's Website

US Retailers doing business the same old way... just doing it in a smaller way



Paula Rosenblum, a retail technology analyst and managing partner at Retail Systems Research, expected retailers to be more innovative in the midst of the recession. Instead, she saw more of a "duck and cover" mentality, and no change in the old habit of ordering merchandise from the furthest corners of the world. They just ordered smaller numbers. In the future, she believes companies should start thinking about sourcing products closer to home.



However, Paula has seen some innovation, including Distributed Order Management, which allows inventory to be treated as a shared resource across channels. To deal with the "new normal," Paula believes companies need to become more self-sustaining and consider sourcing on a local or regional level.





Dustin Mattison: What are the consequences of the recession regarding supply chain management and innovation?



Paula Rosenblum: Well, to be honest, I would have expected to see more. I've been disappointed at retailers' continuing to do business in the same old way -- ordering merchandise far from the point of demand -- just placing smaller bets.


Probably the most useful innovation is Distributed Order Management, which allows inventory to be treated as a shared resource across channels. This mitigates the impact of incorrect buying/forecasting. I think the end of this story will be seen in the holiday season -- when retailers have either bought exactly right... or underbought. THEN we'll start to see some consequences.



Dustin Mattison: What improvements, good consequences and lessons learned do you see? How are we better off?



Paula Rosenblum: The supermarket industry is better off because they've grabbed the previous restaurant diner. Otherwise I frankly don't see much. I suppose the other lesson, although I'm not sure we've really learned it is "there's no such thing as an infinite market." I am also hoping that food-wise, people start turning to local sources, which are both "greener" (have a smaller carbon footprint) and more healthy for our local communities.



Dustin Mattison: What will we be "missing"? Are there things we will need to learn to live without?



Paula Rosenblum: Well, that's the big debate -- what is the "new normal"? I suppose as individuals and companies we will have to learn to live a bit more within our means, and to keep growth in check, and to be more cautious about leveraging our assets. Cheap money turned into no money really quickly.



Dustin Mattison: Are there ways of working that need to be changed, either as a direct effect of the economic downfall, or to help avoid dire consequences in the future?



Paula Rosenblum: Again, it may sound very protectionist, but I actually believe maintaining a sourcing base in one's own country is a sound business practice. Unless we are really willing to tear down our borders and be a true global village (something I am NOT advocating), I do think we need to be somewhat self-sustaining. That means we need the capability to build cars and trucks, make clothes, and grow enough food so that we can have enough to eat.  We have become a debtor nation, and therefore do not control our own destiny anymore. I am very uncomfortable with that.



Dustin Mattison: Do you have any specific examples from your own experience?



Paula Rosenblum: Well... I live in Miami, so I certainly have seen my equity here one day (or one year) and gone the next. This is not an exaggeration. Luckily, I am not over-leveraged and was fortunate enough to convert my interest-only balloon loan into a fixed rate mortgage a year ago, in advance of the balloon, or I would have been in BIG trouble. 




About Paula Rosenblum




Paula Rosenblum is passionate about retail. As a founder and managing partner at Retail Systems Research (RSR), her focus is on the convergence of retail business and enabling technologies. As an experienced retail technology analyst, Rosenblum provides insight into business and technology challenges facing the retail industry ecosystem, as well as thought leadership and advice on navigating these challenges for specific clients and the industry at large.


Connect with Paula on LinkedIn


Company Website

I recently interviewed Sara Husk to hear her views on innovation and setting up processes for innovation within and outside the four walls of a company.



Developing Innovation Systems


One of the things that Sara’s company, Imaginatik, does is help companies develop an innovation system. Innovation overall seems to be maturing. In the past it was more about creative thinking and exploring; now companies are realizing and understanding that innovation needs to become a core competence. One of the things that Sara looks at is how you set that system up successfully. There are several ways to do this:


1. Senior Leadership


What are your senior management individuals doing? Are they visible and championing innovation, meaning setting the metrics, desired outcomes, pace of innovation, etc.? This is a really important part of the system. When we think of a system, an easy one that most people recognize is Six Sigma, which is a competence or system that a lot of companies have put into place. It is really following along in those types of footsteps.


2. Culture and Values


How do culture and values play into this? How do you value, recognize and celebrate collaboration, building out ideas and concepts, moving at a faster pace and tying together all those things that innovation requires? How do you help people make time to innovate?


3. Process and Tools


You must have a sustainable, repeatable, scalable, robust process. You need a strategic direction and pipeline. Where do you want to go and how will we get there? Not everyone has this.


4. Innovation is a Learned Skill


How do you help and skill your people to get the point where they are strong at innovation? Sara and her team at Imaginatik have found that a lot of people in the beginning of innovation believe it is in the minds of a few geniuses or a group in R&D or strategy. On the contrary, it is actually a skill that people can grow over time just like any other proficiency.


Innovation and Supply Chains


The foundational pieces of innovation need to be there even in a supply chain. What might be different in supply chains are the leadership and processes. There is still some resistance to people collaborating with others in their supply chain who are outside their four walls. While there are legal or IP concerns (which are definitely valid and should be looked at), people are becoming much more savvy in terms of how to deal with those types of issues. The leadership can set the tone and pace. Everyone has heard the example of Proctor & Gamble where they decided that a certain amount of innovation would come from outside the company. It is a good example because you can see the good results.


Leaders can decide to work with people in their supply chain and find a way to manage IP and sticky legal issues.  It is easy to say “No” but it is the leader’s job to make sure they push forward.


The process and tools change when you are going outside your four walls because there are different things to think about. Communication is done differently. You need to make sure that everyone outside understands what you are trying to accomplish as well. It is a little more difficult to communicate externally than internally. Your systems need to be set up for things such as how to deal with IP, whose idea is it, etc. You must have an easy way for people in your supply chain to communicate and innovate with you; otherwise they will just walk away.


Sara has seen companies use both a carrot and a stick. How do you recognize those people in your supply chain that are participating with you? How do you put to the side people who are not? Co-innovation can be a requirement for those you want to include in your supply chain.


When you are going outside your four walls you need to think about what your reputation is in the marketplace. Similar to managing a brand you need to decide on how you want to be perceived in the marketplace. You need to make sure you are getting back to people on what happens with their ideas. People need to perceive they are treated fairly when submitting ideas, concepts and proposals. They can potentially go other places and work
with other people. Therefore, it is important to ensure you are communicating in a way that will help external people give you their best ideas. This can potentially turn into a partnership, strategic advantage, etc. This all starts with how you want to be perceived and how you want to communicate externally. There are companies that do this well. They are thinking of these types of questions.


Case Study – The Goodyear Tire & Rubber Company


Goodyear was looking for ways to take advantage of existing technical knowledge and to research its suppliers. While sharing information with key suppliers isn’t new, there’s a growing sense that the most effective way to address complex technical challenges is by actively encouraging collaborative innovation within the supply chain. It’s an idea that has taken firm hold within The Goodyear Tire & Rubber Company. Goodyear is working
with suppliers to create practices that keep them plugged in, to ensure that the best ideas get realized. You can read more by visiting this link.





Sara has seen that as people gain more experience and get better at innovation, they do become more open with their supply chain. It is important for everyone to consider establishing innovation processes. It is becoming easier and the barriers are becoming lowered because other groups are now doing it. If you are not doing it, you will be left behind. What people have been missing is innovation as a process. Innovation is sustainable and repeatable. There are processes involved and the outcomes are always interesting. Even with ideas or concepts that are not workable, you can get everything aligned so that you will get those ideas that will help solve issues. People need to understand the process around getting ideas. That is what the fundamental process is all about.



About Sara Husk


Sara Husk is an operations and project executive with a broad range of experience.  Sara’s experience includes, innovation business process development and execution, innovation software expertise, open innovation, operations management, Six Sigma, project management and account management.


About Imaginatik


Imaginatik provides Collective Intelligence and Idea Management solutions. Imaginatik provides Innovation-as-a-Service - working in each engagement to achieve measurable business results while building a culture of innovation. Through the right mix of best-practice advice, program management expertise, and award-winning software tools, it helps clients reach their full innovation potential. Imaginatik is the trusted innovation partner for clients such as Cargill, State Farm, Whirlpool, CSC, Chubb, Chevron,Bombardier, and Goodyear...Visit their website